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OCTFCU_july_aug_2006.qxd 5/22/06 10:50 AM Page 1 Retirement Savings, One Percent at a Time Many experts suggest setting aside at least 15% of income toward retirement using tax-deferred retirement plans and other savings tools. But this can be difficult for several reasons, especially for individuals who are not already setting aside a significant percentage of their income. If this describes your situation, consider gradually increasing your contribution until it reaches 15%. Making the increase coincide with an annual pay raise might help soften the effect on your take-home pay. $2,000,000 $1,600,000 10% annual contribution 10% contribution in year 1, 11% in year 2, etc., until reaching 15% after 5 years $1,762,039 Trusted Advisor July/August 2006 $1,200,000 $1,236,934 $800,000 Ready to Retire Your Mortgage? $400,000 Living mortgage-free used to be the hallmark of a successful retirement. But today’s retirees and pre-retirees are challenging conventional wisdom and questioning whether paying down the mortgage still makes sense. $0 Year 5 10 15 20 25 30 The graph compares the difference between contributing 10% annually of a $75,000 salary (that grows 3% per year) for 30 years and contributing 10% of the same salary initially and increasing annual contributions by 1% until they reach 15% of salary. Both accounts earn a hypothetical 8% annual return. This hypothetical example is used for illustrative purposes only and does not represent any specific investment. The effect of taxes and investment fees was not considered. Rates of return will vary over time, particularly for long-term investments. Actual results will vary. Unfortunately, there is no easy, one-size-fits-all answer. The appropriate response depends on a number of variables, including your income, current portfolio, risk tolerance, and mortgage balance. Here’s a quick look at some of the factors to consider when determining whether to pay off your mortgage, pay it down faster, or change nothing at all. Mortgage Debt Among Older Americans Percentage of families holding debt secured by a primary residence (by age of head of household). 2001 2004 51.0% 49.0% ■ Comfort level. If the thought of carrying a high mortgage throughout retirement makes you nervous, paying it off faster or completely may be a priority for you. Where Credit Is Due American household credit-card debt keeps rising year after year. It’s approaching an average of $10,000 per household.1 Smart Planning Starts Today 32.0% 32.1% ■ Retirement savings. One rule of thumb is that your savings, along with Social Security, should be sufficient to replace 60% to 80% of your pre-retirement income. If you’re comfortable with both your savings level and your mortgage payment, paying down your mortgage may be less important. Rising Indebtedness Average U.S. credit-card debt per household Credit cards are almost essential in American life. Just try renting a car or a hotel room without one. But anyone who has ever used a credit card to finance a large purchase knows that the real cost of the purchase can greatly exceed the original price because of finance charges. ■ Mortgage interest rate. If the interest rate you are paying on your mortgage is low, you may be able to earn more from other types of investments. Of course, investments offering the potential for higher rates of return also involve more risk. 18.7% 9.5% 55–64 years 65–74 years 75 years and older Source: Federal Reserve, 2006 continued on page 3 There is yet another cost of debt that most people don’t consider: the lost opportunity to invest. An individual spending $400 per month to retire a $20,000 credit-card balance charging 8% interest would have to make payments for five years. If the $400 was instead invested in an account earning a hypothetical 5% annual return, the balance after five years could reach more than $52,000. Looking at the situation in this way, a $20,000 credit-card balance actually cost $52,000 in lost opportunity. This hypothetical example is used for illustrative purposes only and does not represent any specific investment. Actual results will vary. The effect of taxes and investment fees was not considered. 1) CardWeb.com, 2005 4 $8,940 $9,205 $9,312 To update your mailing address for Trusted Advisor, log in to Online Banking>>Services>>Trusted Advisor. Update your address on the form shown and click “submit.” You may also call us at 800/4OCTFCU. $8,234 $7,842 Issue Highlights Developing a Plan for Long-Term Care . . . . . . . . . . . . . . . . . . . . . . 2 Good News for Long-Term Investors . . . . . . . . . . . . . . . . . . . . . . . . 3 Retirement Savings, One Percent at a Time. . . . . . . . . . . . . . . . . . . 4 Where Credit Is Due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2000 2001 2002 Source: CardWeb.com, 2005 2003 2004 Investment products and services offered through CUSO Financial Services, L.P. (CFS) are not NCUA/NCUSIF insured, not Credit Union guaranteed, and may lose value. Financial Advisors are employed by OCTFCU and registered through CFS. OCTFCU is in partnership with CFS. (Member NASD/SIPC) OCTFCU_july_aug_2006.qxd 5/22/06 10:50 AM Page 2 Smart Planning Starts Today Developing a Plan for Long-Term Care Paying the Bill Here’s how people responded when asked how they would pay the bill if they (or a family member) required nursing-home care. Insurance 30% Don’t know 30% 16% Self/Savings Medicare/ Medicaid/ Government 13% Other Family Social Security 6% 3% 2% Source: Kaiser Family Foundation Health Poll Report Survey, June 2005 Most people realize that nursing-home care is expensive, but not everyone has taken steps to prepare for the risk of needing such care. It’s estimated that about half of all 65-year-olds will eventually enter a nursing home.1 Put another way, you and/or your spouse have up to a 50/50 chance of requiring nursing-home care at some point in your life. The good news is that you have a number of options when it comes to paying for long-term care. There are benefits and limitations with each. Today, a glance at the stock market indexes shows why many investors have been disappointed. From 2000 to 2005, the average annual return of the S&P 500 was –1.14%, and the cumulative return for the same period was –6.63%.1 It might help to remember that in good times or bad, market fundamentals and the overall economy can have a direct effect on stock prices. Government Programs You might be surprised to learn that the benefits provided by government programs, such as Medicare and Medicaid, are very limited. Medicare, for example, pays for only the first 20 days of skilled nursing care after a minimum three-day hospital stay. Patients are responsible for a portion of the cost from days 21 to 100 and all costs after 100 days.2 Setting aside money to cover the cost of long-term care — or using assets you and your family have accumulated — is always an option, but it could be cost-prohibitive. In fact, one study found that you would have needed to set aside about $192,838 in 2005 and earned a 5% rate of return to cover the cost of four years of nursing-home care.3 Long-Term-Care Insurance Long-term-care insurance may be a good option for people with assets who cannot afford to self-insure. Most policies cover skilled care and basic custodial care. You can choose the daily benefit, the benefit period (typically, two to five years, or lifetime), the maximum lifetime benefit, the waiting period, and whether you want inflation protection. You may also be able to decide the kind of facilities in which you would like to receive care. Most policies offer nursing-home care, home care, and assisted-living facility care. Planning may be the best defense to prepare for the risk of long-term-care expenses. Call so that we can review options to help protect you and your family. 1–3) 2005 Field Guide, The National Underwriter Company Undoubtedly, it has been a turbulent period fraught with terrorism, war in the Middle East, and episodes of corporate scandal. Painfully, mutual fund investors have learned not to count on the double-digit stock market returns that they once took for granted. It might help to remember that in good times or bad, market fundamentals and the overall economy can have a direct effect on stock prices. Gauging Growth The economy has continued to grow, despite a series of shocks that include several devastating hurricanes in the Gulf of Mexico and high oil prices. Gross domestic product has grown between 2.7% and 4.5% each year since 2003, and economists have predicted that the economy will grow by 3.25% in 2006.2, 3 Medicare does not cover the cost of custodial care (nonskilled care that includes assistance with activities of daily living). Medicaid may provide some coverage, but only for those with low incomes and limited assets. Self-Insurance 2 Good News for Long-Term Investors Profits Stay Positive More good news: The operating earnings per share for S&P 500 companies have risen 90% during the last four years.4 Furthermore, if the consensus forecast of 13% earnings growth in 2006 comes to fruition, it would mean an unprecedented fourth consecutive year of double-digit earnings growth.5 Over the last three years, the S&P 500 has risen cautiously toward its peak in 2000. Could it be that several years of solid economic growth and impressive corporate profits will ultimately bode well for stock market returns? Even professionals can’t predict exactly how the financial markets will respond to positive reports or external shocks. However, only those investors who have realistic expectations and stick to a disciplined approach will be in a position to benefit when the markets perform favorably. Mutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest. 1) Thomson Financial, 2006, for the period 12/31/1999 to 12/31/2005. Stocks are represented by the S&P 500 Composite Index (total return), which is generally considered representative of the U.S. stock market. The performance of an unmanaged index is not indicative of the performance of any particular investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results. 2) Bureau of Economic Analysis, January 2006 3–5) The Wall Street Journal, February 6, 2006 Ready to Retire Your Mortgage? (continued from page 1) ■ Appreciation rate. The amount of money you owe on your home has no effect on its market value. If your home is in an area where values are rising, then any appreciation will occur whether your mortgage is large or small. ■ Tax bracket. If you keep making mortgage payments, you will be able to continue deducting the mortgage interest. This may be a valuable tax savings if you are in a high tax bracket in retirement. ■ Source of funds. What funds will you use to pay down your mortgage, and what is the cost of using those funds? Will you be subject to any fees or penalties? What are the tax implications, if any, of using those funds? ■ Security. Nothing can replace the role your home will play in retirement in terms of shelter, comfort, and security. Because your home is probably your biggest financial asset, you may want to exercise extra caution when making financial decisions about it. ■ Reflect on your heirs. With today’s high real estate prices, your home’s value could cause your estate to be subject to estate taxes. An analysis of your financial situation may reveal whether putting your money somewhere other than in your home could help reduce or eliminate your exposure to estate taxes. Your home will be an extremely valuable aspect of your retirement, so consider your options carefully before taking any action. Call today for help with this and other decisions that could affect your financial future. 3 OCTFCU_july_aug_2006.qxd 5/22/06 10:50 AM Page 2 Smart Planning Starts Today Developing a Plan for Long-Term Care Paying the Bill Here’s how people responded when asked how they would pay the bill if they (or a family member) required nursing-home care. Insurance 30% Don’t know 30% 16% Self/Savings Medicare/ Medicaid/ Government 13% Other Family Social Security 6% 3% 2% Source: Kaiser Family Foundation Health Poll Report Survey, June 2005 Most people realize that nursing-home care is expensive, but not everyone has taken steps to prepare for the risk of needing such care. It’s estimated that about half of all 65-year-olds will eventually enter a nursing home.1 Put another way, you and/or your spouse have up to a 50/50 chance of requiring nursing-home care at some point in your life. The good news is that you have a number of options when it comes to paying for long-term care. There are benefits and limitations with each. Today, a glance at the stock market indexes shows why many investors have been disappointed. From 2000 to 2005, the average annual return of the S&P 500 was –1.14%, and the cumulative return for the same period was –6.63%.1 It might help to remember that in good times or bad, market fundamentals and the overall economy can have a direct effect on stock prices. Government Programs You might be surprised to learn that the benefits provided by government programs, such as Medicare and Medicaid, are very limited. Medicare, for example, pays for only the first 20 days of skilled nursing care after a minimum three-day hospital stay. Patients are responsible for a portion of the cost from days 21 to 100 and all costs after 100 days.2 Setting aside money to cover the cost of long-term care — or using assets you and your family have accumulated — is always an option, but it could be cost-prohibitive. In fact, one study found that you would have needed to set aside about $192,838 in 2005 and earned a 5% rate of return to cover the cost of four years of nursing-home care.3 Long-Term-Care Insurance Long-term-care insurance may be a good option for people with assets who cannot afford to self-insure. Most policies cover skilled care and basic custodial care. You can choose the daily benefit, the benefit period (typically, two to five years, or lifetime), the maximum lifetime benefit, the waiting period, and whether you want inflation protection. You may also be able to decide the kind of facilities in which you would like to receive care. Most policies offer nursing-home care, home care, and assisted-living facility care. Planning may be the best defense to prepare for the risk of long-term-care expenses. Call so that we can review options to help protect you and your family. 1–3) 2005 Field Guide, The National Underwriter Company Undoubtedly, it has been a turbulent period fraught with terrorism, war in the Middle East, and episodes of corporate scandal. Painfully, mutual fund investors have learned not to count on the double-digit stock market returns that they once took for granted. It might help to remember that in good times or bad, market fundamentals and the overall economy can have a direct effect on stock prices. Gauging Growth The economy has continued to grow, despite a series of shocks that include several devastating hurricanes in the Gulf of Mexico and high oil prices. Gross domestic product has grown between 2.7% and 4.5% each year since 2003, and economists have predicted that the economy will grow by 3.25% in 2006.2, 3 Medicare does not cover the cost of custodial care (nonskilled care that includes assistance with activities of daily living). Medicaid may provide some coverage, but only for those with low incomes and limited assets. Self-Insurance 2 Good News for Long-Term Investors Profits Stay Positive More good news: The operating earnings per share for S&P 500 companies have risen 90% during the last four years.4 Furthermore, if the consensus forecast of 13% earnings growth in 2006 comes to fruition, it would mean an unprecedented fourth consecutive year of double-digit earnings growth.5 Over the last three years, the S&P 500 has risen cautiously toward its peak in 2000. Could it be that several years of solid economic growth and impressive corporate profits will ultimately bode well for stock market returns? Even professionals can’t predict exactly how the financial markets will respond to positive reports or external shocks. However, only those investors who have realistic expectations and stick to a disciplined approach will be in a position to benefit when the markets perform favorably. Mutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest. 1) Thomson Financial, 2006, for the period 12/31/1999 to 12/31/2005. Stocks are represented by the S&P 500 Composite Index (total return), which is generally considered representative of the U.S. stock market. The performance of an unmanaged index is not indicative of the performance of any particular investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results. 2) Bureau of Economic Analysis, January 2006 3–5) The Wall Street Journal, February 6, 2006 Ready to Retire Your Mortgage? (continued from page 1) ■ Appreciation rate. The amount of money you owe on your home has no effect on its market value. If your home is in an area where values are rising, then any appreciation will occur whether your mortgage is large or small. ■ Tax bracket. If you keep making mortgage payments, you will be able to continue deducting the mortgage interest. This may be a valuable tax savings if you are in a high tax bracket in retirement. ■ Source of funds. What funds will you use to pay down your mortgage, and what is the cost of using those funds? Will you be subject to any fees or penalties? What are the tax implications, if any, of using those funds? ■ Security. Nothing can replace the role your home will play in retirement in terms of shelter, comfort, and security. Because your home is probably your biggest financial asset, you may want to exercise extra caution when making financial decisions about it. ■ Reflect on your heirs. With today’s high real estate prices, your home’s value could cause your estate to be subject to estate taxes. An analysis of your financial situation may reveal whether putting your money somewhere other than in your home could help reduce or eliminate your exposure to estate taxes. Your home will be an extremely valuable aspect of your retirement, so consider your options carefully before taking any action. Call today for help with this and other decisions that could affect your financial future. 3 OCTFCU_july_aug_2006.qxd 5/22/06 10:50 AM Page 1 Retirement Savings, One Percent at a Time Many experts suggest setting aside at least 15% of income toward retirement using tax-deferred retirement plans and other savings tools. But this can be difficult for several reasons, especially for individuals who are not already setting aside a significant percentage of their income. If this describes your situation, consider gradually increasing your contribution until it reaches 15%. Making the increase coincide with an annual pay raise might help soften the effect on your take-home pay. $2,000,000 $1,600,000 10% annual contribution 10% contribution in year 1, 11% in year 2, etc., until reaching 15% after 5 years $1,762,039 Trusted Advisor July/August 2006 $1,200,000 $1,236,934 $800,000 Ready to Retire Your Mortgage? $400,000 Living mortgage-free used to be the hallmark of a successful retirement. But today’s retirees and pre-retirees are challenging conventional wisdom and questioning whether paying down the mortgage still makes sense. $0 Year 5 10 15 20 25 30 The graph compares the difference between contributing 10% annually of a $75,000 salary (that grows 3% per year) for 30 years and contributing 10% of the same salary initially and increasing annual contributions by 1% until they reach 15% of salary. Both accounts earn a hypothetical 8% annual return. This hypothetical example is used for illustrative purposes only and does not represent any specific investment. The effect of taxes and investment fees was not considered. Rates of return will vary over time, particularly for long-term investments. Actual results will vary. Unfortunately, there is no easy, one-size-fits-all answer. The appropriate response depends on a number of variables, including your income, current portfolio, risk tolerance, and mortgage balance. Here’s a quick look at some of the factors to consider when determining whether to pay off your mortgage, pay it down faster, or change nothing at all. Mortgage Debt Among Older Americans Percentage of families holding debt secured by a primary residence (by age of head of household). 2001 2004 51.0% 49.0% ■ Comfort level. If the thought of carrying a high mortgage throughout retirement makes you nervous, paying it off faster or completely may be a priority for you. Where Credit Is Due American household credit-card debt keeps rising year after year. It’s approaching an average of $10,000 per household.1 Smart Planning Starts Today 32.0% 32.1% ■ Retirement savings. One rule of thumb is that your savings, along with Social Security, should be sufficient to replace 60% to 80% of your pre-retirement income. If you’re comfortable with both your savings level and your mortgage payment, paying down your mortgage may be less important. Rising Indebtedness Average U.S. credit-card debt per household Credit cards are almost essential in American life. Just try renting a car or a hotel room without one. But anyone who has ever used a credit card to finance a large purchase knows that the real cost of the purchase can greatly exceed the original price because of finance charges. ■ Mortgage interest rate. If the interest rate you are paying on your mortgage is low, you may be able to earn more from other types of investments. Of course, investments offering the potential for higher rates of return also involve more risk. 18.7% 9.5% 55–64 years 65–74 years 75 years and older Source: Federal Reserve, 2006 continued on page 3 There is yet another cost of debt that most people don’t consider: the lost opportunity to invest. An individual spending $400 per month to retire a $20,000 credit-card balance charging 8% interest would have to make payments for five years. If the $400 was instead invested in an account earning a hypothetical 5% annual return, the balance after five years could reach more than $52,000. Looking at the situation in this way, a $20,000 credit-card balance actually cost $52,000 in lost opportunity. This hypothetical example is used for illustrative purposes only and does not represent any specific investment. Actual results will vary. The effect of taxes and investment fees was not considered. 1) CardWeb.com, 2005 4 $8,940 $9,205 $9,312 To update your mailing address for Trusted Advisor, log in to Online Banking>>Services>>Trusted Advisor. Update your address on the form shown and click “submit.” You may also call us at 800/4OCTFCU. $8,234 $7,842 Issue Highlights Developing a Plan for Long-Term Care . . . . . . . . . . . . . . . . . . . . . . 2 Good News for Long-Term Investors . . . . . . . . . . . . . . . . . . . . . . . . 3 Retirement Savings, One Percent at a Time. . . . . . . . . . . . . . . . . . . 4 Where Credit Is Due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2000 2001 2002 Source: CardWeb.com, 2005 2003 2004 Investment products and services offered through CUSO Financial Services, L.P. (CFS) are not NCUA/NCUSIF insured, not Credit Union guaranteed, and may lose value. Financial Advisors are employed by OCTFCU and registered through CFS. OCTFCU is in partnership with CFS. (Member NASD/SIPC)